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Poland’s fiscal expansion continues, as PM Donald Tusk shows little sign of scaling back his predecessor’s policies of high defence spending, generous wage increases, and lavish social welfare payments.
Almost a year on from a parliamentary election which brought an end, after eight years, to the deeply conservative government of Poland’s Law and Justice (PiS) party, there are few obvious signs of any substantial change on the streets of the country’s towns and cities—at least not when it comes to the economy.
The policies of PiS, broadly free market but with a penchant for generous social welfare handouts and encouraging the development of state-owned national champions (such as the flag carrier airline, LOT) have left a complicated legacy.
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The current coalition of Donald Tusk, prime minister since December 2023, which includes parties from both the centre-right and centre-left, therefore faces significant challenges: addressing significant fiscal imbalances, accelerating the economic recovery, and ensuring long-term stability amid ongoing geopolitical risks without alienating PiS-leaning voters who benefitted from its welfare policies.
So far, it has attempted to do so by out-PiSing PiS.
Signs of recovery
After enduring a marked economic slowdown in 2023, which saw GDP growth shrink to just 0.2 per cent, Poland is poised for a solid rebound. Most institutions, including the European Commission, forecast GDP growth of around 2.8 per cent for 2024, driven by a resurgence in private consumption and investments, particularly those fuelled by EU funds. Growth is forecast to increase further, to over four per cent, in 2025.
This prolonged recovery will largely be financed by European Union Recovery and Resilience Facility (RRF) funds, which under PiS had been blocked by Brussels over rule-of-law issues.
The activation of these funds, unfrozen in February and worth up to 60 billion euros (as well as a further 76.5 billion euros in cohesion funds), represents a significant financial injection into sectors like green energy, digital transformation, and infrastructure.
According to Poland’s Minister for Development Funds Regional Policy, Katarzyna Pełczyńska- Nałęcz, the country aims to spend (or earmark for spending) 23 billion euros by the end of the year.
However, Poland’s renewed growth is expected to be uneven. The global economic environment remains challenging, with Poland’s major trading partners, particularly Germany, facing economic slowdowns.
Poland’s export sector, already grappling with the slow but steady appreciation of the złoty, which has eroded profitability, is likely to struggle against these external headwinds. Net exports are projected to have a negative contribution to growth in 2024. This places even greater pressure on domestic consumption and EU-funded investments to drive the recovery.
Inflation and wage growth
Inflation, which had been a severe issue throughout 2023, is expected to ease significantly in 2024 but remains a concern. After peaking at 18.4 per cent in early 2023, inflation fell as low as two per cent in March but has since climbed to 4.3 per cent in August.
These new inflationary pressures have been driven in part by significant wage growth. The Polish government implemented a new minimum wage of 4,300 złoty (1,001 euros) in July, a 20 per cent increase, while public sector salaries are also rising substantially—30 per cent for teachers and 20 per cent for other public employees. In January, the minimum wage rises again, to 4,666 złoty.
Earlier this month, the president of the Polish Chamber of Trade, Maciej Ptaszyński, warned in a letter to Tusk that the increased labour costs would be, “to the detriment of small and medium-sized businesses and, consequently, to the detriment of the Polish economy”.
Indeed, while these wage increases will boost household incomes and spur private consumption, they also risk fuelling further inflationary pressures as businesses pass on higher labour costs to consumers. The return of persistent inflation by the end of the year is now a real threat.
Moreover, the labour market, while resilient, presents its own challenges. Unemployment remains at historically low levels, around three per cent, but labour shortages—despite the number of foreign workers rising six per cent in 2023 to 1.13 million—pose a growing risk to sustained growth. Employers are likely to continue facing difficulties in filling some positions, which could further increase wages and exacerbate inflationary pressures.
Balancing the budget
Perhaps the most pressing issue facing Poland in 2024 is its fiscal position. The general government deficit is expected to rise to 5.4 per cent of GDP, driven by increased spending on defence (at 4.12 per cent of GDP in 2024, it will be NATO’s biggest spender as a share of GDP), social programmes, and public sector wages.
This marks a continuation of the fiscal expansion that began under the previous government, which prioritised defence spending in response to the war in Ukraine and increased social transfers ahead of last year’s parliamentary election.
Public debt is also on the rise, projected to reach 53.7 per cent of GDP in 2024. While this remains below the EU average, it represents a significant increase from pre-Covid-19 levels. The new government’s fiscal room for manoeuvre is limited, with investors closely watching whether it will take steps to consolidate public finances and reduce the deficit.
Encouragingly, Tusk’s administration, while constrained by the previous government’s budgetary framework, has nevertheless shown some signs of attempting to curb excessive spending.
Some of Tusk’s more ambitious election pledges, such as further increases in the tax-free allowance, have been delayed or scaled back. However, the high level of public debt and deficit will necessitate far more careful management to avoid undermining investor confidence.
Opportunities for growth
Despite these challenges, Poland remains the largest and most dynamic economy in Central and Eastern Europe (the number of Polish firms making their mark beyond the country’s borders is evidence of that) and has significant opportunities on which it can capitalise.
The activation of the RRF funds will be a critical driver of growth, particularly in the green energy and infrastructure sectors. Investments in renewable energy, energy efficiency, and digital transformation are expected to accelerate, helping Poland meet its climate goals while creating jobs and boosting economic output.
Additionally, private investment is expected to play a key role in driving growth. Poland’s robust industrial base, particularly in sectors like automotive, IT, pharmaceuticals, and household appliances, remains a strong asset.
Moreover, the country’s strategic position as a logistics hub for Central and Eastern Europe offers further opportunities. The ongoing expansion of infrastructure, including road, rail, and port projects, will help solidify Poland’s role as a key player in European supply chains.
Geopolitical risks
Poland’s economic outlook is inextricably linked to its political landscape. Tusk’s government may have repaired Poland’s relationship with the European Union, unfreezing the EU funds, but some tensions remain, particularly regarding judicial reforms and media independence.
Any new deterioration in relations with Brussels could risk further delays in EU fund disbursements, which are critical to the country’s growth prospects.
On the regional front, the war in Ukraine continues to pose risks. Poland has been one of the largest supporters of Ukraine, both in terms of military aid and humanitarian assistance, placing a significant strain on public finances.
While the conflict has also significantly strengthened Poland’s strategic importance within NATO and the EU, it remains a source of uncertainty, particularly if the conflict escalates or spills over into neighbouring regions.
The key to Poland’s recovery will lie in its ability to balance short-term fiscal expansion with long-term stability.
The Tusk government’s ability to consolidate public finances, manage inflationary pressures, and maintain strong relations with the EU will be critical in determining whether Poland can sustain its recovery and continue its trajectory as Central and Eastern Europe’s economic leader.
The stiff tests in the months ahead—which now include recovering from devastating floods that beset southern Poland in mid-September—will quickly demonstrate if it is capable of meeting the challenge.
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